Outsourcing in Focus: Strategies for Navigating the Market and Boosting Your Results

The Labor Outsourcing Sector.

The Labor Outsourcing Sector stands out as one of the most relevant in Brazil today. According to data from the National Confederation of Industry, 80% of Brazilian Companies use outsourcing in some sector or activity.

Activities such as Cleaning, Maintenance, Surveillance, and Logistics are among the main functions with the highest number of outsourcing in the Brazilian and international markets. In addition to these, the outsourcing of Technology and Financial Management activities, through BPO Companies, has also stood out in recent years (Business Process Outsourcing), which provide specialized labor to assist in administrative processes.

According to data from Febraf (Federation of Companies of Facilities), Brazil has 222 Thousand Establishments that provide Labor Outsourcing Services, which employ about 10.4 million people, which corresponds to about 9.5% of the Economically Active Population according to the IBGE.

The Average of 47 Employees per Company shows that the Brazilian market is still highly dispersed, where thousands of regional companies still prevail. The GPS Group, main Player of the Outsourced Services market, whose Gross Revenue in 2024 was R$ 14.7 Billion, has only 4.6% of MarketShare.

Due to the high dispersion of the Market, Growth through Mergers and Acquisitions has been common in recent years. Since 2023, the GPS Group has acquired 8 companies in the Maintenance, Safety, HR and Food sectors. These Companies accounted for R$ 1.1 Billion of the Company's Gross Revenue in 2024. In addition to the GPS Group, Verzani and Sandrini have also made acquisitions with the objective of increasing their Market Share in an inorganic form.

Characteristics of Companies

Companies in the Labor Outsourcing Sector have low profitability as their main characteristic, when compared to other sectors of the Economy.

A study conducted by FC Partners with 16 Public Companies in the Labor Outsourcing Sector, Brazilian and international, shows that the Average EBITDA Margin in 2023 was 11%.

Usually, the pricing of an Outsourcing Project is based on the Gross Wage of the worker to be outsourced. To the amount of the Salary are added the Taxes, Benefits, Labor Charges, Inputs necessary for the provision of the Service, Apportionment of Administrative Expenses and the Profit of the Outsourcing Company, which ranges from 5 to 10%.

To achieve a higher return than expected in the pricing, the Company must achieve operational efficiency that generates savings on top of the provisioned amounts.

Examples:

(i) If, at the end of a Client's contract, the Company is able to relocate the Employees to another Client, the amount payable for the termination (included in the price calculation) will be postponed, having a positive impact on the DRE's result;

(ii) Pricing considers, for example, the cleaning materials to be used to provide the service. If the Company achieves a good negotiation with its Suppliers, the savings will be converted into Profit Margin.

Due to low Margins, good Financial Management is fundamental to business success. The Medium and Long Term view of Cash Flow is essential to ensure that the Company will not have difficulties meeting its commitments.

At the end of the year, for example, the thirteenth salary is paid. Companies receive, on a monthly basis, the amount proportional to the thirteenth that will be paid at the end of the year. Poor financial management will spend this resource in advance and there will be a lack of money to honor the future commitment, creating the need to resort to Bank Loans.

A situation like this, not infrequently, turns into a Snowball that deteriorates the financial situation of Companies rapidly.

Valuation and Good Operating Practices

Due to low profitability, the Outsourcing Sector has Valuations low when the valuation is based on Market Multiples.

In the study conducted by FC Partners, Companies were valued, on average, at 0.8 times their Net Revenue and 8.9 times their EBITDA.

To reduce business risk and increase the Company's valuation, some practices can be implemented by managers:

(i) Low Customer Concentration: having Revenue dispersed over a large Client Portfolio reduces the risk of a financial crisis if the Company loses an important Client;

(ii) Low Concentration in Specific Sectors: Having Revenue well distributed in various sectors reduces the risk of losing Customers on a large scale if a particular sector of the economy enters into crisis;

(iii) Low dependency on the Public Sector: Government Contracts depend on Tenders and Competitions that may lead to sudden revenue losses;

(iv) Good Financial Management: Good Financial Management is essential for sustainable growth. Pricing correctly and analyzing, on a monthly basis, the result generated by each Contract is essential to immediately correct any route deviations.

(v) Good Legal Management: Labor risk is the main risk inherent to Outsourcing. Reducing this risk through efficient Legal Management is essential for the success of Companies.

(vi) High Profitability Services: In addition to Labor, Companies must evaluate the inclusion, in their Portfolio, of Services that increase the profitability of the Contracts and make it difficult for the Client to replace the Service Provider. A Cleaning Company, for example, that also collects and disposes of Waste, will achieve better results than a competitor that works only in Cleaning.

Conclusion

Although they work with low profitability, Labor Outsourcing Companies have a vast Potential Market, since approximately 80% of Brazilian companies outsource part of their activities. In this way, a high volume of Clients will generate positive results.

In the coming years, the advancement of Technology will have significant impacts on the market. Virtual concierge tools, for example, reduce the number of employees needed and guarantee safety to the Condominiums that use it. Outsourcing Companies that have such tools will be able to reduce their Cost to provide the Service.

FC Partners has experience with several companies in the Outsourcing sector through Financial Diagnostic Projects, individually evaluating the profitability of each Contract, analyzing Costs and Expenses to contribute to improvements in the Profit Margin, in addition to the definition of strategies to take advantage of existing opportunities in the market.

Good Internal Management and the vision to take advantage of the new technologies existing in the market are the key to success in the Outsourcing Sector in the coming years.

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